Managing the financial supply chain is rapidly becoming a major topic in the treasury world. At EuroFinance’s International Cash and Treasury Management conference in Florence last September, Hewlett-Packard received the annual Award for Excellence for the company’s thought leadership in this area. We spoke to Sarah Jones, Director – EMEA Treasury of Hewlett- Packard, to find out why the financial supply chain matters and what can be done to manage it.

What is your role at HP?

I manage all HP’s treasury activities throughout the Europe, Middle East and Africa (EMEA) region. In revenue terms, that represents approximately $38 billion dollars for fiscal year 2005. My team is split into a Treasury Services team and a Treasury Consulting team. The Treasury Services team are responsible for the daily cash management operations for 29 countries, which includes some of the Latin American countries as well as Canada, and approximately 250 legal entities. They also manage HP’s offshore cash investment portfolio and the monthly worldwide netting settlement activity. The Treasury Consulting team has a more strategic focus and supports HP’s businesses and infrastructure functions across the region in addition to managing our banking relationships.

We have three treasury centres worldwide – one in Palo Alto, which is our headquarters; one in Singapore, which looks after the Asia Pacific region; and the one whose activities are described above, based in the UK.

To ask a broad question, what is the financial supply chain?

When people talk about the ‘supply chain’ that incorporates both the physical and the financial supply chains. I would define the financial supply chain as the order-to-cash and procure-to-pay end-to-end processes – but not the physical movement of goods.

I think some people confuse working capital management with the financial supply chain, but I would say that the former is a subset of the latter. I don’t think you can optimise working capital management without a broader focus on the end-to-end financial supply chain.

Why did you decide to focus on this area at HP?

Historically, HP Treasury was the first infrastructure function to lead the way in consolidating into global shared service centres, as described above, and creating standard global processes. The rest of the finance functions followed suit by transitioning financial business processes such as accounts receivable and accounts payable to global and regional shared service centres supported by the deployment of a standard ERP application – in our case, SAP. In the financial business process world, given the headcount numbers, the focus was very much on consolidating into shared service centres in order to take advantage of the differences in labour costs between low-cost countries such as India and higher cost Western Europe and the US.

Once an organisation has squeezed as much efficiency out of its internal processes as it possibly can, the focus is then on remaining business process inefficiencies. When you analyse the remaining inefficiencies in accounts receivable and accounts payable processes, they typically stem from the exchange of paper between customers, vendors and banking partners. The logical next step is to focus on the opportunities that arise from the automation and digitisation of information exchange between corporate buyers and sellers.

Where did you start?

We started by looking at the Accounts Receivable (AR) reconciliation process. The age old issue of matching credits on your AR bank account with open invoices in your SAP system. The root cause of the problem is two-fold – firstly banking systems, especially when funds are moving cross-border, are not designed to carry much information related to the underlying transaction behind the need for a payment. Secondly, even though customers might print and mail a remittance advice, the global, virtual world of the shared service centre does not marry well with the paper, postal world. Therefore, when we receive our AR bank statements every day, even though the bank statement is electronic, the information needed for us to complete the financial business process of matching credits on our bank statements to individual invoices, is extremely labour intensive. The limited reference data that the banks are able to carry through the banking systems bears no resemblance to anything meaningful to an AR reconciliation clerk.

So we initially looked at the ability to deliver an electronic remittance advice via an e-commerce solutions provider, and the ability to generate a unique reference ID which would follow both a payment and a remittance advice through their separate systems to allow them to be eventually matched up. We worked on the functionality to take electronic remittance advice information and feed it into SAP. However, the issue of the banking systems even being able to carry a unique reference ID and populate that ID into a data field that would be standard across all banks remained an issue.

After some time trying to address this issue, we put the project to one side. I began to realise that by taking a more holistic view of the supply chain, focusing on some of the front end processes, we might be able to eliminate the need to do remittance advice reconciliation at all. For example, if electronic invoices could be exchanged via a central hub or data utility, and payments could be initiated directly out of the hub, based upon a buyer’s acceptance of the invoice. All of the information that would be needed to clear open invoices could be transported from the hub directly into an ERP application without the need for the bilateral exchange of information between corporate buyers and sellers and between corporates and their banking partners.

Do you have one of these hubs?

No – it’s just a concept at the moment but there are a number of players looking at this area and I think it will be interesting to see who actually develops and hosts it. I believe that there will be multiple hubs servicing a country or community but that will be OK as long as they allow for interoperability at a technology and a data level. At the data level this would be achieved through the harmonisation of existing message standards.

How do you see this area developing?

My end state vision is for a treasurer to be able to utilise what is today a fairly static asset on the balance sheet in the form of their accounts receivable portfolio, on a more dynamic basis. By taking a more holistic approach to what is a fairly self-contained issue, eg accounts receivable matching, there are opportunities not only to eliminate downstream processes, but also to create new marketplaces. By that I mean that there is the potential to take electronic invoice information and package it in such a way that it becomes a commoditised, tradeable instrument. The really interesting part comes into play if financiers are able to ‘look-through’ the supply chain and identify the higher creditworthy parties on which to base their financing decisions. The ‘look-through’ capability stems from the technology and is, by the way, very much in alignment with the way in which companies are becoming more and more regulated.

Ideally, as a treasurer looking at my daily cash position and needing access to liquidity, I should be able to post future-dated, committed cashflows out in the market place and then get financiers to bid on a discount rate for those cashflows based upon the creditworthiness of the ultimate payor.

My simplistic view of the world is that anything you can do in the paper-based, bilateral world is achievable in the digital, multilateral world.

How would a company go about implementing a solution?

You don’t just wake up one day and say, I’m going to implement an end-to-end financial supply chain solution today. If you look at the financial supply chain, it touches multiple parts of an organisation which are often fragmented and siloed. So you have to break it down from an implementation perspective. For example, we are looking at the use of digital identities for account opening and bank signatory maintenance. Once a company starts to use digital identities, albeit in a self-contained process such as bank account opening, you’ve already got one of the components or enablers for the end-to-end financial supply chain. A digital identity can create the legality (non-repudiation, authentication and authorisation) that is needed for an electronic transaction to become a tradeable instrument, eg turning an electronic invoice into invoice acceptance.

The other very important aspect of a holistic view of the financial supply chain is to ensure that internal metrics are not so siloed as to drive the wrong behaviours. Take DSO as an example. It’s very easy to create a low DSO which looks great from a balance sheet perspective, but what about the resulting P and L or revenue impact? The same analogy applies for DPO – large buyers have a tendency to force longer payment terms, but if this means that small and medium size suppliers have to finance themselves for an incremental number of days at a cost of funds that is much higher than the large buyer, the result is going to end up in the buyer’s P and L at some point.

The mindset going forward has to be to view suppliers and other providers in the supply chain as partners, rather than as pure vendors and thinking more holistically about the decisions that are made and the impact they might have on the whole supply chain. That’s why we’re seeing a greater focus on solutions such as reverse factoring, which allows the supplier to get financing based on the credit worthiness of the blue-chip payer.

Whereabouts is HP in terms of this vision?

Currently we are focusing on the component parts of an end-to-end financial supply chain – so we’re looking at e-invoicing, digital identities, and creation of more efficiency in our accounts receivable processes. We are also reviewing our internal metrics to ensure the optimal result from both a balance sheet and P and L perspective. Through all of this I am hoping that we will be able to connect the dots in order to get to the end state vision.

After all, the days of labour arbitrage opportunities are numbered as salary inflation in some of the low-cost locations escalates and it is simply not practical to shift thousands of headcount from one country to another. Therefore, we are going to have to address the root causes sooner or later. Transformation solutions that focus on the end-to-end process are going to become more and more relevant.

What is the treasurer’s role in all this?

Treasurers typically have both an internal as well as an external focus, unlike some other parts of a company’s financial organisation. Through these external contacts we get insight as to developments in the marketplace and that puts us in an ideal position to champion the thought leadership and the change in mindset that’s required for a company to drive this type of initiative. I don’t believe that a treasurer will become responsible for the implementation and deployment of these sorts of solutions, but I do think its incumbent on the corporate treasurer to help champion and sponsor them.